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In a step that would further infuse Rs 40,000 crore into the system, India’s central bank Reserve Bank of India has cut cash reserve ratio by 100 basis points from 6.5% to 5.5%. The bank has also cut Repo rate by 50 basis points (bps) from 8.0% to 7.5% with effect from Nov 3. This signals softening of interest rates to prop up growth. This is in continuation to the 100 bps repo rate cut announced on Oct 20, and 1 per cent CRR cut on Octopber 15.

The CRR cut will be effected in two tranche. In first stage, 0.5% will be cut retrospectively with effect from Oct 25 and second tranche will be effective from Nov 8. The CRR cut will release about Rs 40,000 cr into the system easing the liquidity crunch, mentions the press release by RBI.

The Statutory Liquidity Ratio (SLR) has also been slashed to 24 % of NDTL to be effective from the fortnight beginning Nov 8, 2008. For the purpose of meeting the funding requirements of NBFCs and Mtutal Funds (MFs), the SLR has been relaxed by 1.5%, on a temporary basis, subject to review. The total accommodation allowed can be apportioned between MFs and NBFCs according to the business needs of the banks. This measure was earlier announced only with respect to MFs.

RBI said it will continue monitoring and reviewing the developments in domestic and global markets and take timely actions in interest of the economy.

The Steps By RBI on Saturday (Via Reuters)

* To reduce the repo rate or its main short-term lending rate by 50 basis points to 7.5 percent with effect from Nov. 3, 2008.

* To cut banks’ cash reserve ratio, or the amount of funds banks have to hold with it on deposit, by 100 basis points to 5.5 percent in two steps. The measure will release 400 billion rupees ($8.1 billion) into the banking system.

* To reduce banks’ statutory liquidity ratio or the percentage of deposits that banks have to invest in federal debt by 1 percentage point to 24 percent.

* To provide refinance facilities to all scheduled commercial banks from the Reserve Bank of India for an equivalent to up to 1.0 per cent of each bank’s net demand and time liabilities (NDTL) as on October 24, 2008 at the repo rate up to a maximum period of 90 days.

* Banks can borrow up to 1.5 percent of their deposits in cash from the central bank to onlend it to non-banking finance companies to meet their funding requirements.

* The Reserve Bank of India would continue to sell dollars through agent banks to augment supply in the domestic foreign exchange marekt or intervene directly to meet any demand-supply gaps.